I was stumped a bit the other day when my elderly aunt buttonholed me with a strange query: “What are the chances of the government selling the postal services to some private company?” Taken aback, I retorted, “Why do you ask”? “I saw on TV that the government is bringing in some new law to make sick government-controlled banks loaded with bad loans bankrupt and the depositors might not get their money back. All my savings are in bank and I was just wondering whether to move the money to postal savings and whether it would be safe there”, she explained.
I realised that she might have seen some TV chat show on the proposed “Financial Resolution and Deposit Insurance Bill 2017, tabled in Parliament and under consideration of a joint parliamentary committee and which might well get passed in the Winter Session itself once the committee submits its report.
I started musing over the perplexing contradictions: While enrolling tens of millions of poor people as bank account holders, why is the government simultaneously preparing to force some crisis-ridden banks to go under insolvency, depriving millions of their existing accountholders who would be left in the lurch? What is the government really up to in first forcing millions of people to deposit all their money in banks under forced demonetisation and later arming itself to push the banks into bankruptcy depriving all of them and many millions more not only of their deposits but even their legal entitlement to receive a minimum of Rs. 1 lakh as compensation under a 1961 law?
After allocating a huge amount of money for recapitalisation of the financially sick banks and after arming themselves with the Insolvency and Bankruptcy Code (IBC) 2016 to push for maximum recovery of overdue loans to bring down stressed assets of banks, why instead of taking the process to the logical end and nursing stressed PSBs back to health is the government rushing to prepare for killing some of them with this proposed law?
Why this bankruptcy law now for banks and financial institutions which is seemingly antithetical to the IBC? It is true that the IBC doesn’t cover banks and other companies providing financial services in view of provisions of the Government Savings Bank Act 1873 and the Reserve Bank Act 1934 and hence though they are also listed companies, the National Company Law Tribunal (NCLT) cannot decide upon and execute their liquidation. So the government needs an overriding law no doubt. But what is the urgency now? In fact, an RBI report succinctly summarises the history of preparing the legal basis for liquidating sick banks and financial firms but despite the recommendations of a working group and then a task force the matter remained in cold storage [See https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=849]
Does it indicate a change in strategy or at least a two-track approach by the Modi Government in tackling the burden of NPAs in public sector banks? Will the government use this bill only as a scarecrow to pressurise the corrupt and recalcitrant banking bureaucracy to act for swift recovery to improve their financial health so that some public sector banks could be privatised either through strategic sale or through leveraged purchase of shares by big private corporates in staggered disinvestment?
But then there is a hitch. In view of provisions of the Indian Contract Act 1872 and the Transfer of Property Act 1882, as the GoI had taken a $2 billion loan in 2009 for “banking support” and signed a deal for a further $4.3 billion-dollar recapitalisation loan from the World Bank, it would be difficult to transfer the ownership of the PSBs to private corporates in the absence of an overriding law.
In fact, reversal of Indira Gandhi’s bank nationalisation and privatisation of Indian banking has already advanced considerably. Today, three of the four largest banks in India are private, namely HDFC, Axis Bank and ICICI Bank and the only PSB to figure among the top four is the ailing State Bank of India. The executives of all these and other private banks have indicated that they are eying takeover of some relatively viable PSBs. Ironically enough, foreign institutions control 49 per cent of the stakes in HDFC, 62 per cent in Axis Bank and 38 per cent in ICICI Bank and 55 per cent in the fourth largest private bank, the Kotak Mahindra Bank (the government had allowed up to 74 per cent FDI in banks in 2016) and those who are supposedly ardent nationalists are offering Indian PSBs to foreign-controlled “Indian” banks!
Some activists of the All India Bank Employees Association I talked to have expressed other reservations. They are pointing out that asset reconstruction – buying up of NPAs and bad assets, to either forcibly recover the loans or to liquidate the collaterals and the assets and recovering the investment – is a booming business evoking tremendous interest among foreign financial institutions who want to buy bad assets of Indian banks.
India’s No.1 asset reconstruction company ARCIL, controlled by ICICI Bank, has already purchased bad loans worth US$12.6 billion and Reliance Asset Reconstruction Company of Ambanis, Aditya Birla and Kotak Mahindra are jumping into the fray and are planning to rise more than $100 billion for purchasing bad assets. In fact, Uday Kotak of Kotak Mahindra has described the purchase of bad assets for restructuring as a “once-in-a-lifetime” opportunity! What is at stake is Rs. 16–18 lakh crore worth of NPAs and other stressed assets.
Properties of the defaulting corporates referred to the NCLT would also end up with the ARCs when they are liquidated or even restructured. Though the government itself has declared that there are more than 2,000 wilful defaulters, it has brought less than 100 companies under the NCLT so far in three instalments and that too after criticism in the media. There is absolute lack of transparency on why only a select few are brought under the NCLT and numerous others have been left out. Though the Acts and the Rules are in place, there is no transparency about the procedure that would be followed and there is still a large measure of discretionary powers with individual authorities. The bank authorities also adopt indiscriminate steps toward SMEs.
The government brings only listed companies for liquidation under NCLT and in the case of SMEs and private limited MSMEs the banks themselves have already started selling the NPAs to ARCs after the “due process” of declaring them as NPAs and defaulters is supposedly over. Many SME owners are not fully aware of what this “due process” is and bank officials are acting as Shylocks.
A small-scale industrialist named Varadarajan in Ambattur Industrial Estate, Chennai summed up the scenario to this writer as follows: “Earlier the bank managers used to run after us for loan recovery. Now we businessmen are running after the bank managers to somehow avoid referring of our sick firms to the ARCs. The Government has not come up with a viable policy of generous bank assistance for the revival of sick small firms but is instead planning for a law for liquidating the crisis-ridden banks themselves”, he lamented.
Bank employees apprehend that under the threat of liquidation, the government is perhaps planning to force the PSBs to offload their bad debts to a select few ARCs. Even otherwise, takeover of the PSBs by private banks means takeover of all their bad assets as well and instead of continuing as huge liabilities they might prove to be money-spinners.
To support this contention, they point to a provision in the recent amendment to the IBC, which prohibits the promoters from buying their own bad assets in auctions, which he argued was to favour some crony ARCs. The number of bank defaulters might be running into several tens of thousands. As the saying goes: the crisis of many is an opportunity for a few!
My aunt’s apprehension sounded ominous. It is quite likely that my aunt is not alone in having such fears. At stake is the credibility of the government and its financial management. Greater transparency is the urgent need of the hour.
(The author is a freelance journalist and former Polit Bureau member of the CPI(ML) Liberation)